CARPE DIEM

Professor Mark J. Perry's Blog for Economics and Finance

Sunday, December 31, 2006

Economy in 2007?

From today's Gainesville Sun, "Will the Economy Boom or Bust in 2007?" (out for national distriubtion through McClatchy-Tribune newspapers) I say that the economy will continue to perform well and add jobs in 2007.

"The booming five-year economic expansion gets dismissed so frequently that The Wall Street Journal has referred to it frequently as the ''Rodney Dangerfield economy.''Given the longevity and resilience of the current economic expansion, perhaps the ''Energizer Bunny economy'' is a more accurate term. The U.S. economy just keeps on growing and growing, and will continue growing in 2007."

Mark Weisbrot, co-director of the Center for Economic and Policy Research, predicts gloom and doom. "A recession (in 2007) is likely, because of the enormity of the housing bubble and the impact of its collapse."

One Language Someday?

UC Berkeley professor of linguistics John McWhorter writes about Dying Languages and the possibility of a single world language someday:

However, the prospect we are taught to dread — that one day all the world's people will speak one language — is one I would welcome. Surely easier communication, while no cure-all, would be a good thing worldwide. For those still uncomfortable given that this single language would be big bad English, then notice how that discomfort eases when you imagine the language being, say, Lenape (Native American).

MP: Note that English is the official language of The Olympics, and the official language for air traffic control at airports around the world.

Congestion Pricing

From the Washington Post: Maryland and Virginia are moving ahead with a form of congestion pricing on the Beltway and Interstate 95. In exchange for building additional lanes, contractors will be allowed to collect tolls that will vary by the minute. When traffic is heavy, the price will rise to whatever level is needed to keep the express lanes flowing. When demand is low -- presumably at times when traffic is flowing smoothly in the normal lanes -- the price will fall to near zero. MP: Almost any time you observe congestion (excess demand), it's a sure indication that market pricing is not being used. And, to relieve or eliminate congestion, just implement market pricing and the congestion disappears.

Economics of Body Parts

Reason Magazine asks the questions "Who Owns Your Organs?" in an article about the increasingly bizarre proprietary status of human body parts. Body parts aren’t legal property to the people born with them, but can be distributed by doctors, universities, biotech companies, and procurement agencies for profit or otherwise.Organ donation stands as a sort of command economy of gifting: Donors have little say over where their organs go after they die, and procurement professionals prefer that donations simply go to the centralized donor list compiled by the United Network for Organ Sharing. Anonymous donations are prized as pure, but run contrary to the sort of relationship-building that motivates cultures of gifting in the first place.

Saturday, December 30, 2006

Protectionism for US Airlines

This week the U.S. Department of Transportation grounded Richard Branson’s new airline, Virgin America because the airline didn’t meet the regulatory test that requires 75% American ownership. The question is, who benefits from this rule?

Certainly not consumers. One more choice on popular routes like New York to San Francisco could have made a tangible difference to prices.

No, this is old-fashioned protectionism of the kind that the US has been trying to erode in China, India, Brazil and other countries with tightly held markets for services ranging from air travel to banking. Even in those economies, ownership tests are often at 51 percent - not 75 percent. If American carriers can’t survive in the face of even a modicum of foreign competition, perhaps they’re weak enough that they really should be replaced by it.

SarBox Blues

There's something rotten at the heart of America's markets, and that something is the 2002 Sarbanes-Oxley Act. SarBox has put a hammerlock on America's small-time capitalism like no other law before. It's keeping small, innovative companies from getting the capital they need to grow and thrive. Along with the growing number of high-profile lawsuits against companies for what turn out to be differences of accounting opinion, U.S. capital markets are hurting.

As the chart shows, net equity issuance in the U.S. — a measure of how much equity is actually available on U.S. markets — has gone into an alarming decline since SarBox. The trend has accelerated as more companies go private.

It's pretty simple: Company CEOs, faced with lawsuits, a growing list of SEC requirements and the costs that go with both would rather be private and not have the headaches than list on a major exchange and be harassed daily. The SEC has eased some SarBox rules, but needs to do more to restore America's competitive edge.

Economic Week in Review

Summary: This week's economic reports suggest that the housing market's steep slide may be bottoming out, while consumer confidence unexpectedly increased. And with the record books closing on stock market trading for the year, stocks are estimated to post almost a 16% total return for 2006, as measured by the S&P 500 Index—the fourth annual consecutive gain after three straight years of losses. For the week, the S&P 500 rose 0.5o% to 1,418, the 10-year U.S. Treasury yield rose 7 basis points to 4.70%, and the 30-year mortgage rate rose by 4 basis points to 5.72%.

Quote of the Day

"Oil companies don’t set the world price of oil. That’s set in trading rooms in banking houses in New York and London and Hong Kong by young guys who make zillions each year. There is absolutely no evidence that the oil companies are colluding to fix prices at artificially high levels. Those prices are set, again, by traders with Ferraris, not by John D. Rockefeller, who has been dead for many years."~Ben Stein, from this article.

Friday, December 29, 2006

iPods: Made in China, Designed and Enjoyed in US

Assembling iPods in China does create jobs for Chinese workers that probably pay higher than average wages, so China does benefit. But who is getting rich from all the iPods Americans bought this Christmas, and who is getting the most enjoyment from them?

Thursday, December 28, 2006

More on Economic Disparities

People in the media, in academia and among the intelligentsia in general who are obsessed with "disparities" in income and wealth usually show not the slightest interest in how that income and wealth were produced in the first place.

They are hot to redistribute the existing income and wealth but seem wholly unaware that how you do that today can affect how much income and wealth will be produced tomorrow. Any number of schemes for redistributing wealth have ended up redistributing poverty in a number of countries.

Economic Disparities

Who are these minority of the world's population who own a majority of the world's wealth?

They are the population of the United States, Western Europe, Japan and a few other affluent countries. How did these particular people come to possess so much more wealth than other people?

They did it the old-fashioned way. They produced the wealth that they own. You might as well ask why bees have so much more honey than other creatures.

The rhetoric of clever people can verbally collectivize all the wealth that was produced individually, and then they become aghast at the "disparities" that are magically turned into "inequities" in the distribution of "the world's wealth."

Soviet Light Bulb Story

Economists generally oppose price controls because they distort markets, and cause either shortages (e.g. rent control) when there is a price ceiling, or surpluses (e.g. minimum wage) when there is a price floor. Shortages (excess demand) and surpluses (excess supply) represent an inefficient use of scarce resources, and economists support market prices because they eliminate shortages and surpluses, and therefore lead to efficiency.

From the Soviet Union, there are many examples of distortions and inefficiencies from its long history of price controls, but here is a real classic.

Light bulbs, like most other basic goods and staples in the Soviet Union, were often in short supply because the official price was below the market price, resulting in excess demand and prolonged shortages. As a result of the chronic light bulb shortage, an informal, black market developed in the USSR for used, burned-out light bulbs. That is, Soviet citizens would actually pay a positive price for a light bulb that didn’t work.

How would it be possible for a burned-out light bulb to have a positive price, when it would normally just be thrown out? Of what use could anybody have for a used light bulb? Think about it first, and read the answer here.

U.A.E. to Sell Dollars for Euros

The United Arab Emirates plans to convert 8 percent of its foreign-exchange reserves to euros from dollars before September, the latest sign of growing global disaffection with the weakening U.S. currency.The Gulf state is among oil producers, including Iran, Venezuela and Indonesia, looking to shift their currency reserves into euros or sell their oil, which is now priced in dollars, for euros.Central banks in Russia, Switzerland and New Zealand are also diversifying away from the dollar and into yen after the Japanese currency reached a 10- month low against its biggest trading partners in October.

Wednesday, December 27, 2006

Castrocare: He Likes Capitalist Health Care

Nothing exposes the myth of Cuba's vaunted health care system quite like the news that ailing dictator Fidel Castro refuses to use it. Somehow, among all the abundant doctors in Cuba, Castroites couldn't find even one competent enough to care for their ailing leader. Cuban training is no match for that found in the free world.

Instead, Castro prefers medical care from Spain, opting for a free-world Spanish doctor whose accomplishments were developed in an atmosphere of open inquiry and market forces. Ordinary Cubans may get abysmal care, but under the country's two-tier medical system, the communist party elite get whatever they need. And if you are Castro, you can tap services from the capitalist world.

Encyclopedia Updates, Information Age Style

In less than one hour after Associated Press announced at 12:19 a.m. (ET) that President Gerald Ford died, the online encyclopedia listing in Wikipedia for Gerald Ford had already been updated with information about his death, statements by President Bush and Nancy Reagan, details about funeral arrangements, etc. Compare that example of the speed of information today (measured in minutes) to the old days of printed encyclopedias, when this type of information (death of a presdient) might have taken years to make it into print.

December Snow? Upper Michigan is a Good Bet

Endless Series of Imaginary Hobgloblins

"2006 to be the sixth-warmest year on record." Sounds quite scary. But it's as misleading a statement as it is accurate. 2006 will actually be cooler than the previous four years and cooler, as well, than 1998 (see graph above).

The Wages of Growth

The latest reports on wages and income can discount one more canard about the current economic expansion -- namely, that wages are stagnant and workers are doing far more poorly than they did in the 1990s. For example:

Over the past year, the real average wage for nonsupervisory employees has risen 2.8 percent.

That equates to about a $1,200 increase in purchasing power for the typical household this year.

In 2006, real median household income was also up 1.1 percent after inflation

Thus the "stagnant wages" story can join the "jobless recovery," the "outsourcing" crisis and the runaway budget deficit as other tales of woe that have all turned out to be evanescent.

Obsession with Income Disparities

Nobody knows how to make a simple lead pencil - there is no single individual anywhere who knows how to grow the wood, mine the graphite, produce the rubber, and manufacture the paint.

If you cannot understand something as simple as making a lead pencil, why should you be surprised that you don't understand why someone is making a lot more money than somebody else? And often this obsession with income disparities means that somebody ought to "do something" to change what you don't understand.

Usually that means that the government -- politicians -- should impose policies based on your ignorance of what is going on. Can you imagine anything more dangerous than allowing politicians to decide how much money each of us can earn?

Only in India

Hong Kong Passes U.S. for IPOs

HONG KONG: Hong Kong surged past New York this year to become the world's second most popular place — after London — for companies to float new stock listings.

The city's success was due to several factors, analysts say. Being next door to the booming economy of mainland China helped, and tough new U.S. accounting rules have discouraged many companies from listing in America.

Perhaps most important, Hong Kong has benefited from a new trend that involves the rise of regional markets, diminishing the importance of places like New York. With the help of powerful computers and increasing liquidity, capital can easily zoom around the world, scouting for the best investments.

Gives and the Give-Nots

"Our era's common sense of the matter -- that the political left is more compassionate than the political right, and that America is a remarkably ungenerous nation by world standards -- is demonstrably inaccurate. In fact, Sen. John Edwards's repeated claim that there are "two Americas" turns out to be correct but misstated: The line of separation runs most saliently not between the haves and have-nots but between the gives and the give-nots, between those Americans who respond to social needs with their own money and time and those who do not."From a book review in the WSJ of "Who Really Cares?"

Trade Deficit = Merchandise Surplus?

So far this year, the U.S. will sell about $1.2 trillion of our goods to the rest of the world, and we have purchased about $2.0 trillion of goods from the rest of the world. In other words, as a result of international trade, the U.S. will have a NET INFLOW OF $800 billion worth of merchandise INTO the U.S.

Although we call this a "trade deficit," it could just as accurately be called a "merchandise surplus," because we end up with more of other countries' production than they have of ours. That is, if you look at trade as "who ends up with the most stuff?" the answer is clearly the U.S., even though we call it a "trade deficit."

If we measured trade in terms of consumption, instead of production, we clearly have a "merchandise surplus" with the rest of the world.

Actually, because imports and exports are measured as part of the GDP statistics by the BEA, based on PRODUCTION of output, we focus on WHO produces the goods, and and not who CONSUMES the GOODS. Measuring trade that way, we often lose sight of the fact that a "trade deficit" is actually "net merchandise inflow" and a "merchandise surplus."

We end up with a net inflow of stuff from around the world every year, about $800 billion this year, but call it a trade "deficit"?

James Brown, Godfather of Soul, R.I.P.

Progress

See the comparison above (click to enlarge) between "Households Below the Poverty Level in 2001" and "All Households in 1950." For example:

34% of poor households today have dishwashers vs. 2% of all U.S. households in 1950.

97% of poor households today have TV vs. 10% of all U.S. households in 1950.

56% of poor households today have clothes dryers vs. 2% of all U.S. households in 1950.

Due to technological progress, greater productivity and cheaper household goods, the average poor household today lives at a higher standard of living on many dimensions, than the average, or even high-income household 50 years ago.

Increase in Life Expectancy

In the early 1950s life expectancy in developing countries like China and India was about 40 years, and by 2005 it was 74 years in many developing countries like China. This is the greatest increase in life expectancy in such a short period that has ever happened in human history, an increase in life expectancy of more than .50 years, every year, for fifty years!

Sunday, December 24, 2006

Harvesting Cash: Myth of the Small Farmer

The cornerstone of the multibillion-dollar system of federal farm subsidies is an iconic image of the struggling family farmer: small, powerless against Mother Nature, tied to the land by blood.Without generous government help, farm-state politicians say, thousands of these hardworking families would fail, threatening the nation's abundant food supply.This imagery secures billions annually in what one grower called "empathy payments" for farmers. But it is misleading.

Today, most of the nation's food is produced by modern family farms that are large operations using state-of-the-art computers, marketing consultants and technologies that cut labor, time and costs. The owners are frequently college graduates who are as comfortable with a spreadsheet as with a tractor.

In 2003, the owners of the biggest family farms reported an average household income of $214,200, more than three times that of U.S. households on average, and in the top 3% of American households by income.

From a recent article in the Washington Post's series on "Harvesting Cash: Working a Farm Subsidy."

Record Low Unemployment Rates in 15 States

In November, I reported that 14 states set historical record-low unemployment rates in 2006 through September. Based on November state jobless rates just released by the BLS on Friday, there are now 15 states that have set historical record-low unemployment rates in 2006:Alabama: 3.2% in OctoberArizona: 3.6% in AugustCalifornia: 4.5%Florida: 3.0% in JuneHawaii: 2.1% in OctoberIdaho: 3.2% in MarchIllinois: 4.1% in NovemberLouisiana: 2.9% in JulyMontana: 3.4% in MarchNevada: 3.6% in JanuaryNew Mexico: 4.0% in MarchNew York: 4.0% in OctoberUtah: 2.8% in OctoberWashington: 4.6% in MarchW. Virigina: 3.8% in JanuaryA Google News search indicates that nobody has reported this, shouldn't that be big economic news that almost 1 out of 3 states have set record-low jobless rates in 2006?

The Petition of the French Candlemakers

Written by French economist Frederic Bastiat in 1845 as a fictitious appeal to the French parliament on behalf of French candlemakers, seeking protectionism against a cheap, foreign rival:

"We are suffering from the ruinous competition of a rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our candle sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation. This rival, which is none other than the sun, is waging a merciless war on us.

We ask you to be so good as to pass a law requiring the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements and blinds -- in short, all openings, holes, chinks, and fissures through which the light of the sun can enter houses, to the detriment of the fair industries with which, we are proud to say, we have endowed the country, a country that cannot, without betraying ingratitude, abandon us today to so unequal a combat."

Free Trade with America Hurts Europe?

Imagine that this was written in the early 1800s, when Europeans might have seen globalization, and trade with America as a threat to their standard of living, in the same way that Americans today view China and India:

"How Free Trade with America Hurts Europe"

"That is what's at stake when we talk about trade policy: Europe's middle class and the European Dream.

The new mobility of goods with advances in global shipping, makes production of goods possible throughout much of the New World. Workers in the Americas are grossly underpaid, exploited and abused, and they have virtually no rights. Many, including children, work 10, 12, 14 hours a day in the New World, six or seven days a week, for only a few pence a day.

The result has been a global race to the bottom as British and French corporations troll the world for the cheapest labor, the fewest health, safety and environmental regulations, and the governments most unfriendly to labor rights. European trade agreements paved the way for this race: While rejecting protections for American workers or the environment, they protected European investors and corporate interests.

The results of such trade agreements are skyrocketing trade deficits with the USA as we import its cheap goods, and downward pressure on income and benefits for European workers. Why? Because these agreements enable countries to ship what their low-wage workers produce to the UK and France, while blocking many European products from entering their countries.

Millions of Europeans have lost their jobs as European corporations moved production overseas to build the same products with cheap foreign labor in the Americas. We must insist that all trade agreements have labor, environmental and other protections so that European workers can compete on a level playing field."

We believe there is a better way. Fair trade is not the enemy of more trade. It's how we expand international trade without reversing U.S. economic progress.

The result (of free trade policies) has been a global race to the bottom as corporations troll the world for the cheapest labor, the fewest health, safety and environmental regulations, and the governments most unfriendly to labor rights."

See a discussion on Cafe Hayek here: "But what relevance do facts and logic possess when political grandstanding must be done to appease the greedy interest groups who are so vital to keeping arrogant, obnoxious, and utterly repulsive politicians in power?"

A few comments of mine:

1. Notice that the article NEVER once mentions the primary beneficiaries of free trade and globalization: CONSUMERS. The politicians ONLY mention the groups that are most threatened by trade and globalizaiton: workers and unions. Notice also there is NO politicial payoff (more votes) to politicians being champions for the U.S. consumers, who are unorganized and dispersed, but there IS a political payoff (more votes) being a champion for the organized groups like unions.

Even though there are NO economic reasons for protectionism, there are HUGE POLITICAL reasons for protectionism, and this article is a perfect example of the political payoffs possible when supporting protectionism for well-organized, domestic special interest groups like unions and domestic industries.

2. Almost any time somebody (Lou Dobbs, politicians, unions, etc.) says they supports "fair trade" over "free trade," it is almost a sure signal that: a) they don't really understand free trade, and/or b) their idea of "fair trade" means using the political process to support some type of unfair, biased, government-managed PROTECIONIST LEGISLATION to protect an inefficient, uncompetititve domestic industry from more efficient foreign producers, at the expense of the unorganized American consumers.

Saturday, December 23, 2006

The Fixed Pie Fallacy

Quote of the day, from economist Milton Friedman:

“Most economic fallacies derive from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.”

In terms of globalization and international trade, we see the “economic fallacy of the fixed pie” in operation all the time, just listen to Lou Dobbs on CNN every night. Many people think that China or Japan are somehow benefiting at our expense because of trade, or because of a current account deficit with those countries. Many people think that the gains from globalization somehow lift up the standard of living in China or India, by bringing down the standard of living in the USA; or that the gain in wages in other countries comes at the expense of a decline in American workers’ wages, etc.

But all of those beliefs are all based on the fixed pie fallacy. There is NOT a fixed, static amount of wealth or wages in the world, which is what the fixed pie fallacy assumes.

Stand back from economics and trade and think instead about life expectancy or literacy. There is certainly not a fixed amount of “life expectancy” in the world, nor is there a fixed amount of “literacy.” It is certainly possible for the life expectancy or literacy rates in 0ther countries to INCREASE, without DECREASING life expectancy or literacy in the US! That is, advances in life expectancy or literacy in China do NOT come at the expense of the US, because there is NOT a fixed amount, and the most likely outcome is that advances will continue to take place in BOTH countries.

Likewise, since there is not a fixed amount of wealth or prosperity in the world, globalization and trade will benefit BOTH the U.S and China.

Economics of Gift-Giving

From the Armchair Economist: Economics and Everyday Experience, by Steven E. Landsburg:

"I am not sure why people give each other store-bought gifts instead of cash, which is never the wrong size or color. Some say that we give gifts because it shows that we took the time to shop. But we could accomplish the same thing by giving the cash value of our shopping time, showing that we took the time to earn the money.

My friend David Friedman (son of Milton Friedman) suggests that we give gifts for exactly the opposite reason – because we want to announce that we did not take much time to shop. If I really care for you, I probably know enough about you to have an easy time finding the right gift. If I care less about you, finding the right gift becomes a major chore. Because you know that my shopping time is limited, the fact that I was able to find something appropriate reveals that I care. I like this theory."

Econ vs. Marketing

From an email from an MBA student: The textbook for our MBA marketing class says: "A negative balance of trade is considered harmful because it means U.S. dollars are supporting foreign economies at the expense of U.S. companies and workers." She also cites my blog posting the other day about trade and the balance of payments, where I state that there is no "trade imbalance" once we account for trade flows and capital flows.

"I find it interesting that these two ideas seem to conflict one another. It appears that the marketing book does not take the flows of capital into account. I am curious about your thoughts on this."

It's a very interesting question, and here are some thoughts:

1. As you mention, the marketing textbook has not considered the capital inflow that accompanies the "negative balance of trade." There is ALWAYS a positive balance on the capital account to offset any "negative balance of trade" on the current account (merchandise), as the graph above clearly demonstrates.

2. About the second part of the sentence, you could ask the question "harmful to whom?" Keep in mind that both U.S. consumers and U.S. firms shop wisely (ruthlessly?), and buy imports when those products give them the best value. If you buy a cashmere sweater from China, or travel on vacation to Canada, or Starbucks buys coffee from Brazil, those transactions make the buyers better off and the foreign sellers better off, so I don't think any of those traders consider their behavior to be "harmful."

3. About the last part of the sentence - "US dollars supporting foreign companies at the expense of U.S. companies," - not true when you consider the total picture: merchandise and capital.

Think about a U.S. company exporting to Japan, and invoicing for 100m yen. Upon receipt of the 100m yen, the U.S. firm realizes that the yen are "worthless" in the U.S. in terms of purchasing power. You cannot spend Japanese yen at Target, Macys, Wal-Mart or McDonald's. You cannot purchase U.S. stocks or bonds or mutual funds with yen.

A firm in China or Japan exporting to the U.S. and invoicing for $1m finds itself in the same situation of holding currency that is "worthless" in terms of domestic purchasing power in those countries. The Japanese firm holding $1m in Japan has only 3 choices:

a. Hold and hoard the dollars. This would actually be the best of all possible options, but is also the most unlikely option. If Japanese companies would accept, hold and hoard "green pieces of paper with dead presidents' pictures" in return for their production of merchandise, we could just print an infinite supply of dollars and acquire their output for green pieces of paper. So although that is one possible option, we'll assume that is unlikely to happen, which leaves two realistic options.

b. Buy U.S. merchandise, or U.S. financial securities. We will buy about $125 billion of Japanese imports this year, which would put $125 billion of dollars in the hands of Japanese firms. The firms in Japan will buy about $75 billion of merchandise from the U.S. and $50 billion of U.S. financial assets (stocks, bonds, real estate, foreign direct investment (FDI) in US firms, treasury bonds, etc.). In that sense again, there is a “negative balance of trade” with Japan of $50 billion for MERCHANDISE ONLY, but a capital inflow of $50 billion, and the balance of payments with Japan is ZERO.

c. The firms receiving the dollars could also sell those dollars for Yen, in which case somebody else in Japan, has the same two options above. That is, if the firm that originally received the dollars has no interest in U.S. merchandise or assets, it could sell the dollars to somebody else in Japan who DOES have an interest in buying U.S. products or securities. But the dollars spent overseas ALWAYS COME BACK TO THE US to buy our merchandise or assets.

Bottom Line: The view that a “negative balance of trade is considered harmful,” is incomplete at best, and probably more likely inaccurate from an economic way of thinking.

For one concrete example: Toyota directly employs nearly 40,000 people in the U.S. and Toyota's investment in the U.S. is valued at more than $18 billion, and it purchases $30 billion of parts annually from U.S. companies. To say that our “negative balance of trade with Japan of about $50 billion annually (merchandise only)” totally ignores the $50 billion of capital inflow INTO the U.S. supporting jobs, output and production IN the U.S.

Economic Week in Review

Reports released during the week indicated that the U.S. economy grew slower during the third quarter (2.0%) than previously reported (2.2%) for real GDP growth. The Producer Price Index (PPI)—a closely watched indicator of wholesale prices—rose sharply, primarily as a result of higher energy costs. However, overall inflation was unchanged in November. In other reports, the index of leading economic indicators increased, the struggling housing industry received a welcome bit of good news, and orders for durable goods grew. For the week, the S&P 500 Index fell 1.1% to 1,411. The yield of the 10-year U.S. Treasury note rose 2 basis points to 4.62%, and the 30-year mortgage rate rose 3 basis points to 5.68%. For the week, the dollar was up slightly vs. the Yen, and down slightly vs. the pound and euro. Read more details here.

Friday, December 22, 2006

Embrace Globalization

From today's Washington Post, an excellent article on globalization by William H. Overholt, Director of the Center for Asia Pacific Policy at the RAND Corporation, here are some excerpts:

"Globalization has brought countries with about 3 billion people from subhuman conditions of life into modern standards of living with adequate food, basic shelter, modern clothing rather than rags, and life spans that are over 60 rather than under 45. In the early 1950s China's life expectancy was 41 years, in 2005 it was 72.7 years. This is the greatest reduction of inequality that has happened in human history."

"A few years ago it took 40 hours of labor to produce a car. Now it takes 15. That translates into a need for fewer workers. Protectionists who blame China for such job losses are being dishonest. In fact, both China and the U.S. have lost manufacturing jobs due to rising productivity, but China has lost 10X more -- a decline of 25 million Chinese jobs, from over 54 million in 1994 to under 30 million ten years later."

"Lower prices due to imports from China alone -- ignoring all other similar results of globalization -- probably raise the real incomes of lower income Americans by 5 to 10 percent. That's something no welfare program has ever accomplished."

MP: An important part of globalization is learn how to expand your perspective and embrace "global thinking." Most of the Lou Dobbs protectionists think about globalization from the extremely narrow viewpoint of American workers in the manufacturing sector who have either lost their jobs or earn less income due to global competition, while ignoring the millions and billions of beneficiaries of globalization: American consumers saving billions of dollars from global imports, American companies being more profitable and expanding output, production and employment due to globalization, millions of workers around the planet who are now better off because of globalization, etc.

Think about this thought experiment: You wave a magic wand, and sickness and disease vanish tomorrow, and life expectancy is extended by 50 years on average. On a net basis, the world would be a MUCH better place, without sickness and disease, without question. However, certain groups would be displaced and worse off in the short-run: doctors, nurses, hospital administrators, etc. who would lose their jobs.

Free trade and globalization are much the same: the world is a MUCH better place with free trade and globalization, on net, than a world without globalization and no trade, even though some are worse off in the short run, an inevitable result of ALL PROGRESS. Those who oppose globalization are lot like those who would oppose, out of self-interest, improvements and advances in medicine that would eliminate disease.

In the 1700s, there were probably protectionists in Europe on a populist crusade about the cheap imports from the USA, and a loss of some European jobs due to globalization and outsourcing to the USA, just like the protectionists today on a populist crusade about cheap imports from China, and outsourcing to India?

Thursday, December 21, 2006

Embrace Trade Deficit, Embrace Capital Inflow

"For decades, the U.S. trade deficit has been a political and journalistic lightning rod, inspiring countless predictions of America's imminent economic collapse. The reality is different.

Our imports grow with our economy and population, while our exports grow with foreign economies, especially those of industrialized countries. Though widely criticized as an imbalance, the trade deficit and related capital inflow reflect U.S. growth, not weakness -- they link the younger, faster-growing U.S. with aging, slower-growing economies abroad.

With all the negativism about the U.S. economy, it's easy to forget its attractiveness. Foreigners are as eager to invest in the U.S. as we are to buy goods and services from them -- it's a two-way street. The trade deficit is the mechanism allowing consumption and investment in the U.S. to grow faster than in Europe and Japan."

Bottom Lines:

1) As the graph above clearly shows, there really is NO trade "imbalance" when you account for trade flows of merchandise (current account) and trade flows of capital (capital account). The $800 billion trade deficit on our current account is exactly offset by an $800 billion capital account surplus. In other words, the Balance of Payments is always ZERO, -$800b (current account) + $800b (capital account) = 0. Trade accounts are based on double-entry accounting, so there can never be a deficit without an offsetting surplus, and there can be no trade "imbalance."

2) The "trade deficit" on our current account (merchandise) gets all of the attention, and the "trade surplus" on the capital account (investments) gets little attention. A Google news search for the phrases "current account deficit" and "capital account surplus" shows that "current account deficit" appears 4X as frequently as "capital account surplus," even though they are "two sides of the same coin."

3) We get the best of both worlds: a) we get to shop globally for the best and cheapest products the world has to offer and b) we attract investment capital from all over the planet that helps finance the expansion of our companies, and helps finance your student loan, mortgage or car loan.

Embrace the trade deficit, and embrace the capital inflow that results from the trade deficit.

Ford Falls to #3, Toyota Rises to #2

DEARBORN, Michigan — The Ford Motor Company expects Toyota to unseat it for good next year as the No. 2 company, behind General Motors, in the American car market, a position Ford has held since the 1920s, according to internal Ford projections.

Those projections show that company officers believe that Ford will permanently fall to third place as soon as January. The shift appears to be happening much faster than Ford had previously signaled. Read more here.

Minimum Wage Increase is a Done Deal

President Bush signaled support for raising the federal minimum wage, suggesting the White House is looking for an early deal with Democrats on one of their priorities next year.

"I support the proposed $2.10 increase in the minimum wage over a two-year period," Mr. Bush told reporters at a year-end news conference, calling it an "area where we can work together" with Democratic leaders. At another point, he said that along with education, it is a "key" area where "we've got to work together" with Democrats.Isn't that a perfect example of "bipartisan consensus?" P.J. O'Rourke on bipartisan consensus: "I like legislative gridlock. What I hate is bipartisan consensus. Bipartisan consensus is like when my doctor and my lawyer agree with my wife that I need help."Question: Why not pass legislation to index the minimum wage with automatic annual increases at the rate of inflation?Answer: Probably because it doesn't give politicians any future political payoffs. The current bipartisan consensus about the minimum wage illustrates a typical pattern: Democrats propose a minimum wage increase, Republicans at first resist, but eventually concede and give reluctant, delayed support, but then BOTH parties can take credit for "helping" the unskilled workers by pricing many of them out of the labor market with an increase in the minimum wage. With an indexed minimum wage, the political payoff to both parties would end forever.

Wednesday, December 20, 2006

PayPal vs. Google Checkout

When Google introduced Checkout in June, it was seen as a formidable rival to PayPal, eBay's online payment service. And with Google aggressively promoting Checkout during the holiday season and beyond, its use with some merchants has already surpassed PayPal's.

Raising Unemployment for the Unskilled?

"On the verge of controlling Congress, the Democrats are making a much-delayed increase in the minimum wage their signature attempt to lift incomes and quiet widespread economic anxiety.

The Democrats plan to introduce a bill in Congress next month that would increase the federal minimum for the first time in a decade — to $7.25 an hour in the spring of 2009, reaching that level in three steps from the present $5.15 an hour.

More than 13 million workers earning less than $7.25 an hour today, or just above that, would get raises."

Problem: Demand curves for unskilled workers slope downward, so a 40% hike in the wage for unskilled workers would mean that there were would be FEWER than 13 million jobs after an increase in the minimum wage. Many of those workers would probably be getting pink slips instead of raises.

And if it was possible to legislate raises for the 13 million unskilled workers currently earning $5.15 per hour, why are politicians being so stingy? After all, wouldn't a raise to $17.25 per hour be a lot better for the 13 million workers than just $7.25? Or $27.25 per hour?

Economic Analysis of Profling

Economist Walter Williams on racial profling:Let's look at a few cases of "profiling" that cause little or no controversy. Mortality rates for cardiovascular diseases were approximately 30 percent higher among black adults than among white adults. The Pima Indians of Arizona have the world's highest known diabetes rates. Prostate cancer is nearly twice as common among black men as white men. Would anyone bring racial profiling charges against a doctor who routinely ordered more frequent blood tests and prostate screening among his black patients and more glucose tolerance tests for his Pima Indian patients?

It Was a Tax Hike for the Rich, Not a Tax Cut

A lot of people claim that the 2003 tax bill was a "tax break for the rich," including Paul Krugman of the NY Times. (Do an advanced Google search for Paul Krugman and the phrase "tax cuts for the rich" and you'll get 29,000 hits. Do it for George Bush and you'll get 182,000 matches.)

Not true, according to several recent studies released by the government, and reported in today's WSJ:

According to the IRS annual study of income tax data, just released for 2004:

Americans who earned more than $1 million in adjusted gross income paid $178 billion, or an average of $740,000 per filer, in income taxes in 2004.

That's a 33% increase in taxes for that group since 2002, the year before the 2003 tax cuts in marginal income-tax and dividend and capital gains rates.

The wealthiest 1% paid almost 37% percent of all individual income-tax payments in 2004, up from 34.27% in 2003.

Meanwhile, a separate report from CBO that tracks monthly tax collections shows that tax revenues keep increasing. In the first two months of Fiscal 2007 through November, tax revenues climbed by 9% compared to the previous year, and this is on top of the increase in tax revenues of 15% in 2005, and 12% in fiscal 2006. The federal budget deficit is down to 1.8% of GDP -- lower than the average for the last 25 years.

Bottom Line: It wasn't a "tax cut," it was a tax increase in revenues. And it wasn't a "tax cut for the rich," it was a "tax hike for the rich." Tax revenues are at an all-time high, and "the rich" are paying more than ever, what's to complain about?

Largest Cash Crop: Marijuana

U.S. growers produce nearly $35 billion worth of marijuana annually according to a recent report, making the illegal drug the country's largest cash crop, bigger than corn ($23 billion) and wheat ($7 billion) combined. Only prohibition and the drug war's distortion of the laws of supply and demand make an easily grown weed worth as much as gold. If growing wheat was illegal and there was a "war on wheat," wheat would probably be worth a lot more than $5 per bushel.

Tuesday, December 19, 2006

Property Taxes Explode as Home Prices Rise

Property tax collections have exploded over the last four years according to a new report by Gerald Prante, an economist at the Tax Foundation.

Adjusted for inflation, property taxes have increased by 12 percent, Prante said. "It's about 27 percent in nominal terms since 2000." By comparison, property taxes increased by just 2 percent from 1994 to 2000. Soaring property taxes around the country have pushed lawmakers to seek reforms.

Does Studying Econ Make You More Conservative?

"Some of the striking insights of economics make one more respectful of the market as a mechanism for coordinating a society. Because market participants are motivated by self-interest, a person might naturally be suspect of market-based societies. But after learning about the gains from trade, the invisible hand, and the efficiency of market equilibrium, one starts to approach the market with a degree of admiration and, indeed, awe."

Like a course in music appreciation, economics helps students develop an appreciation of the market, the "capitalist rainforest."

Speed Limits on the Information Superhighway

Don't most people want connections to the Internet to be faster, and not slower? Well, not in the Islamic Republic of Iran, if the government has anything to say about it, which, well, of course they have a lot to say about it, since they set the rules of Internet access, and just about everything else in Iran.

TEHRAN - Iran's internet service providers (ISPs) have started reducing the speed of Internet access to homes and cafes based on new government-imposed limits, a move critics said appeared to be part of a clampdown on the media.

An official said last week that ISPs were now "forbidden" by the elecommunications Ministry from providing Internet connections faster than 128 kilobytes per second (KBps), the official IRNA news agency reported. He did not give a reason.

$3000 Shark's Tooth?

There were more than 30 bids, and the price was bid up to over $3000 on Ebay for this flawless 6-inch shark's tooth from a 60-foot prehistoric megalodon (approx. 5 millions year ago), but the reserve price was not met. Megalodon sharks were the largest predatory fish to have ever lived.

Biggest Swiss Army Knife Ever

The Right Minimum Wage: $0.00

When the media give us a portrait of a typical minimum-wage worker, they are almost always wrong. They usually portray a mother or a father with at least two children, who are unable to make ends meet on the $10,300 provided by the minimum wage. In fact, the great majority of "minimum wagers" are much different, say the American Enterprise Institute (AEI).

The number of people on the federal minimum wage of $5.15 per hour is many fewer than most people imagine:

In 2005, there were only 1.9 million workers earning the minimum wage (out of 145.6m workers in the U.S., or only 1.3% of the labor force).

63% work only part-time and are not full-time workers, and a majority (53%) are under the age of 25 -- most of them students or weekend workers.

Within this disproportionately large pool of youth "minimum wagers," 2/3 come from families with at least one other family member earning income.

80% of minimum wagers belong to families above the poverty line.

Average income of the family of a young individual earning minimum wage is just over $64,000.

Who are the losers from a higher minimum wage, and who will actually gain?

Less than 13% of the benefits from a federal minimum-wage increase would go to poor families, while 63% would go to families earning more than twice the poverty line, and 42% to those 3X above the poverty line.

A hike in the minimum wage will hurt low-skilled workers most because those jobs will be increasingly difficult to find.

As Milton Friedman said, "Minimum wage laws are defended as a way to help low-income people," when "in fact, they hurt low-income people... The minimum wage law requires employers to discriminate against persons with low skills."

The real problem with unskilled workers is not that they are underpaid, but they are "underskilled." And how best to develop skills? Get and keep a job, which is hard to do when an unskilled worker has been priced out of the labor market by an increase in the minimum wage. That is why the NY Times wrote an editoral once titled: "The Right Minimum Wage: $0.00 per Hour."

Tragedy of the Commons, College-Style

Another example of how common ownership of property or resources leads to misuse of property and tragic results:"The Berry College (Georgia) Student Government Association (SGA) used student activity funds to purchase 20 bicycles for student use on campus.

The bright red bicycles, each with an identifying plate reading “Berry Bike,” were available to al students on a “first-come, first-served” basis, making them a common property resource. In spite of the relatively favorable environment for common-property bicycles at Berry College, it took less than two months for many of the bikes to be lost, stolen, or abused. Read more here.

From Republican to Libertarian

Former Republican Congressman Bob Barr in an interview with Reason Magazine about why he left the Republican party to join the Libertarian Party:

"And I chose to join the Libertarian Party because at this time in our nation’s history, it’s fundamentally essential to join a party, work with a party, that’s 100 percent committed to protecting liberty. In order to have any chance of saving the Constitution and our civil liberties, we need a party dedicated to that cause."

Monday, December 18, 2006

Sometimes the Cure is Worse Than Disease

The Sarbanes-Oxley Act powerfully illustrates the law of unintended consequences. Due to hasty drafting by Congress in the wake of the Enron and WorldCom scandals, Sarbox has cost the U.S. economy over $1 trillion, according to one study published by the AEI-Brookings Center. To add insult to grievous injury, it is unconstitutional.

Even the statute's co-author, Rep. Mike Oxley, has conceded that Sarbanes-Oxley was hastily written and enacted. In its rush to "do something" about corporate scandals, Congress overstepped the bounds of its authority. It is time to call Congress back, both to help our economy and reaffirm that our constitutional system imposes clear limits on the government's urgent desire to "do something." Congress must be reminded that the "solution" is at times worse than the problem.

Ken Starr, dean of Pepperdine University's School of Law in Saturday's WSJ.

The 1931 Davis-Bacon Act, requiring "prevailing" wages on federally assisted construction projects, was supported by the idea that it would keep contractors from using "cheap colored labor" to underbid contractors using white labor.

Apartheid South Africa enacted a minimum wage to price low-skilled black workers out of selected trades.

In the 1950s, New England textile manufacturers supported Sen. John F. Kennedy's efforts to increase the federal minimum wage to prevent competing mills from starting up in the low-wage South.

Today, the biggest backers of the minimum wage are unions. One reason: they seek to block low-wage workers from competing with higher-skilled, higher-priced, union members.

Upward Sloping Demand Curve?

Ursinus College, a small liberal arts institution in eastern Pennsylvania raised tuition and fees 17.6 percent, to $23,460 in 2000. Then it waited to see what would happen.

Ursinus received nearly 200 more applications than the year before. Within four years the size of the freshman class had risen 35 percent, to 454 students. Applicants had apparently concluded that if the college cost more, it must be better.

Read more in the NY Times article "In Tuition Game, Popularity Rises With Price."

Double Taxation Just Got Worse

The United States is the only developed country that taxes it citizens while they are overseas. Americans abroad are also taxed in foreign countries where they reside. And it's gotten worse recently. President Bush signed into law a bill that sharply increases tax rates for Americans abroad with income of more than $82,400 a year. The legislation also increases taxes on employer-provided benefits like housing allowances.

But with new tax pressures facing American expatriates due to the new legislation enacted this year, international tax lawyers say they detect rising demand from citizens to renounce ties with the United States — "renunciants."

"The administrative costs of being an American and living outside the U.S. have gone up dramatically," said Marnin Michaels, a tax lawyer with Baker & McKenzie in Zurich.

See the article "More Americans abroad giving up citizenship for lower taxes," in the Intl Herald Tribune.

Bottom Line: If you tax something, you get less of it. If you subsidize something, you get more of it.

Free Housing in Mumbai: Private Philanthropy

MUMBAI: In this Indian capital of glamour and commerce, there is a city of high-rises and a city of shanties.

At one extreme is the growing number of towers housing the rich and the aspiring. At the other extreme is a multiplying labyrinth of slums, covering a third of the city and sheltering more than five million people in squalid conditions, with a shortage of water and toilets, a surfeit of disease and the constant odor of feces mixed with garbage.

But now a housing boom in this fast-growing economy is entwining their destinies. To make room for more high-rise buildings, investors are doing what was once left to philanthropists: giving slum dwellers free apartments.

Under an inventive government program in Mumbai, builders raze entire slum neighborhoods and use part of the land for tenements to house the original residents. The apartments measure 225 square feet — the size of a typical shanty. In return, the developer wins the right to build lucrative towers on the rest of the land and pays nothing but the cost of the slum resettlement.

So far, 100,000 such apartments have been built in Mumbai, housing 600,000 people.

Sunday, December 17, 2006

China's Stock Market, +60% This Year

We hear a lot of complaints about China's policy of keeping the dollar overvalued, making Chinese goods cheap for Amercian consumers and businesses. Given the passion of American consumers and firms to get the best price, I don't think you'll find too many buyers of China's products complaining about low prices, most of complaining is coming from U.S. producers how have high prices, and would like more business from buyers who actually prefer low prices. Another benefit of a strong dollar that is often overlooked is the incredible value in recent years of China stocks, see graph above from MSCI for China's stock market, which has tripled in recent years (measured in USD). In 2006 YTD, US investors in China have gotten a whopping 60.34% return! Not bad, more than 4X the return from US stocks (14% YYD). Bottom Line: We not only save money by buying China's cheap products, but we can make money by investing in Chinese companies.

More on the Economics of Diamonds

From an article in today's NY Times, Measuring a Diamond’s True Price:

"The lust for that glittering gravel, extending unbroken from African thieves to British royals to domestic Bridezillas — is manufactured. Hard carbon, as even Nicky Oppenheimer, the charming chairman of DeBeers, has admitted, has no intrinsic value except as grit.

DeBeers, which manages the cartel that has kept diamond prices up far more efficiently than OPEC ever did with oil, fosters that romance. It has run the “A Diamond Is Forever” ads since 1948 and still quietly advises gullible grooms that it is “customary” to spend two months’ salary on a ring.

I got married this month, and my long-suffering bride was kind enough to go along with my refusal to buy a diamond: she has an opal engagement ring and a sapphire wedding ring."

Top 20 Law Schools

According to SSRN, by download counts for all papers authored by individuals affiliated with the law school during the last 12 months, based on data through 12/1/2006:

1. Harvard University - Harvard Law School2. Columbia University - Columbia Law School3. University of Chicago - Law School4. University of Texas at Austin - School of Law5. University of California, Los Angeles - School of Law6. Stanford Law School7. Yale University - Law School8. Emory University - School of Law9. George Washington University - Law School10. Ohio State University - Michael E. Moritz College of Law11. University of Minnesota - Twin Cities - School of Law12. Georgetown University - Law Center13. University of Illinois - College of Law14. Vanderbilt University - School of Law15. New York University - School of Law16. University of Pennsylvania - School of Law17. University of California, Berkeley - School of Law (Boalt Hall)18. Duke University - School of Law19. University of Southern California - Law School20. George Mason University - School of Law

How To Grade Final Exams

It's that time of year, the end of fall semester, and college professors all over the country are spending a lot of time grading papers and final exams. One method of grading papers is outlined by a law professor, and shown in the picture above, here is the post, which is mentioned on Greg Mankiw's blog.

Saturday, December 16, 2006

The Ethanol Scam

Not likely, according to Cornell University professor David Pimental who said in a recent article: "It is absolute stupidity, and it is a major scam."

Why would business leaders, state and U.S. lawmakers perpetuate a "major scam" on the public?

"Big money and politics" Pimentel said. "Those two words tell it all. Ethanol has 45 times the subsidies that gasoline has. Our government is spending $6 billion annually on subsidies for ethanol."

And the government has, since 1978, subsidized the ethanol industry, according to the non-partisan budget watchdog, Taxpayers for Common Sense. Tax exemptions that total more than $11 billion with a production mandate through 2012 plant dollar signs in the eyes of investors, even if the dynamics of corn-produced biofuel present economic and environmental challenges.

Fed Funds Forecast

From the CBOT trading for Federal Funds futures contracts, speculators are betting on future Fed-funds target rate decreases, and we can therefore determine the following forecasts for the fed-funds target rate in 2007:

More Forecasts for 2007

From the WSJ economic forecasting survey in November, these are the average forecasts of 56 economists surveyed:1. First half of 2007 real GDP growth: 2.5%2. Second half of 2007 real GDP growth: 2.8%3. CPI Inflation for May 2007: 2.1%4. Unemployment rate for May 2007: 4.8%5. Fed Funds rate in June 2007: 5.02%

Renting vs. Buying a Home

From an article in the WSJ, "First-Timers Begin Looking At Houses Again: Lower Prices, Mortgage Rates Lure Buyers Off the Sidelines:"

"The share of first-time home buyers dropped earlier this year to its lowest level since 1987. First-time home buyers now account for 36% of home purchases, down from 40% in the three previous years.

High home prices have helped drive many first-time buyers out of the housing market. Now, with prices falling in many areas, there are some signs that buyers are beginning to drift back."

By definition, first-time home buyers are renters, and make a rent-buy decision based on the relative cost of renting a house or apartment vs. buying a house or condo. Therefore, there is significant competition between the two real estate markets: rental market vs. home buying market.

As the table above shows, the cost of renting an apartment, relative to buying a home, has decreased in all cities (except Indiapolis) over the last 5 years, due mostly to the 42% rise in home prices over this period. The table also show that in 2001, it was about 2% more expensive to rent than buy on average, but now it is about 21% less expensive to rent than buy. However, as home prices and interest rates fall, the advantage is shifting back towards buying, and the first-time home buyers are shifting from renting to buying, as the article points out.

For example, a year ago, the monthly payment for a home at the median price of $229,000, at the average 30-year mortgage rate of 6.33%, with a 20% down payment, was $1138. Today, the monthly payment for a median price home of $221,000, at the current rate of 6.16%, would be $1,078, or 5.3% lower than a year ago.

Bottom Line: There probably won't ever be a significant crash in home prices, because of a powerful self-correcting mechanism in place: Once home prices start to fall enough, the advantage shifts towards owning a home vs. renting, first-time homebuyers are attracted by the falling prices, and the demand for buying houses increases. Right now, it's as if houses are "on sale" at a 5% discount compared to a year ago because of falling home prices and falling interest rates. If Macy's can have a sale, why not the real estate market? It's a great time to buy a house.

Economic Week in Review

Summary: In an upbeat week for economic news, the Federal Reserve Board announced Tuesday that it left the target for short-term interest rates unchanged at 5.25%. This marked the fourth meeting that the central bank made no rate adjustments. Investors were also cheered by reports of strong retail sales, a shrinking trade deficit, increased industrial production, and more signs that inflation is being held in check. For the week, the S&P 500 Index rose 1.2% to 1,427, the highest close in more than six years (since Nov 8, 2000). The yield of the 10-year U.S. Treasury note rose 4 basis points to 4.60%.Read more here.